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Investors' jaws dropped when they heard last week that a 26-year-old high school dropout from New York was getting a $1 billion payday from Yahoo! for Tumblr, a company with de minimis revenue and no profit.

This deal isn't kid stuff. It is the consequence of a very vigorous venture capital industry that is able to produce companies that may not make money but that have a certain cachet.

The Street, while blanching at the price, saw the six-year-old startup founded by former Bronx High School of Science student David Karp as one of the deals
Yahoo! YHOO -2.004275788348477%Yahoo! Inc.U.S.: NasdaqUSD36.67
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(ticker: YHOO) must do. It is a sellers' market, in other words.

Yahoo's shares finished the week at $26.33, down 1% over the five sessions.

Yahoo! CEO Marissa Mayer claims that Tumblr's 300 million users will help boost Yahoo's traffic by 20%, which should, she argues, raise the properties' profile with advertisers, especially given that Yahoo! is not far from
Google's
(GOOG) top position in U.S. Web traffic, according to data from research firm comScore.

Half of the usage of Tumblr is on mobile devices, which Mayer says is much farther along than Yahoo's own ability to get people to use its sites on smartphones and tablets.

The deal may help with the company's stated goal of "regaining traction with 18-34 year-olds and making Yahoo! cool again," opined JPMorgan's Doug Anmuth, given that the Tumblr demographics are much hipper than Yahoo's older average user.

Probably, the deal can ultimately be a good one for Yahoo! It brings a fresh sense of product design that the firm badly needs. And it changes Yahoo! from being all about stodgy big media to being a hub of content produced, hopefully, by some of the people who use the Internet most actively.

But what price hip?

Total revenue annually is "trending in the double digits," cracked a source close to Tumblr last week, and Tumblr is still "burning a substantial amount of money."

Yahoo! would need to generate an additional $950 million in advertising per year to justify the price tag, wrote Jefferies & Co.'s Brian Pitz, who has a Hold rating on the shares. Yahoo's projected revenue for this year is just $4.5 billion, so that seems like a bridge very far, if not too far.

The venture-capital machine that brought Tumblr to this pass shows an astounding ability to identify and fund fairly precise startups that may never be the next Facebook but that can quickly amass a following in the tens of millions.

Tumblr received roughly $125 million in venture money in five rounds dating back to 2007, the year of its founding, according to data from Barron's sister publication VentureSource.

The valuation of $800 million on Tumblr after its last round of investment, in 2011, was already reflecting expectations the company could be worth multiple billions, says a venture capitalist who bought into that final round.

With a team of just 177 people, it's unlikely Karp needed all that cash. The simplicity of the Tumblr program is something a talented team can build with modest resources. The money, and the consequent valuation, was the ticket price for late-stage firms that wanted in on the action.

Tumblr's final exit of $1.1 billion was a 38% return for investors in the last round of financing, which is nothing to sneeze at over less than two years, but not the kind of seven- or ten-baggers venture capitalists tend to count on.

Conversely, says our venture capitalist, "When I looked at the projections for the business if we just kept running it, absolutely the potential was there to produce hundreds of millions of revenue at very high margin," he says.

That logic, moreover, is proving itself in the marketplace. When Twitter received investments three years ago, at a valuation of $1 billion, some limited partners told their venture funds they were crazy to invest at that price. But Twitter had a valuation of $9.8 billion after its most recent round of financing, earlier this year, according to VentureSource.

And so it goes. The ability of late-stage investors to have faith in a large future payoff means the prices Yahoo! and other public outfits will pay to get in on the action will continue to be high as they pursue M&A.

Mayer last week told the Street that Tumblr's price tag was "an exception" to her practice so far of doing smaller deals. It's not yet clear, though, whether the exception will become the rule. As of late Friday, Barron's sister publication AllThingsD was reporting Yahoo! is in talks to buy video site Hulu, which in 2011 was reported to have an asking price of $2 billion.

There's no turnaround when it comes to revenue. The company's fiscal Q2 report last Wednesday showed declines in revenue across all the company's lines of business.

But there were operating profit margin improvements across the board. The shares soared the next day and ended the week up 14%, at $24.21, as even skeptical bears on the stock raised their price targets.

HP shares are up 70% this year, and now fetch seven times the $3.60 a share HP may generate this year by its own forecast. There's probably room for the shares to appreciate, as HP is still getting a pass from what JPMorgan's Mark Moskowitz has called "value turnaround mode." Investors are not yet demanding that CEO Meg Whitman show them the growth they hope will arrive some day. Whitman last week told the Street that sales growth is a 2014 affair.

Thus, despite the grumbling of short sellers such as Jim Chanos, HP will for the time being remain the can't-get-worse stock of the year, even if a real turnaround is sketchy at best.